What Software Do Executing Brokers Use for Regulation T Free Funds Verification?

The Letter of Free Funds Process—and Why Most Firms Still Do It Wrong

Rey Acosta opened a brokerage account in October 2023. By January 2024, that account held $2.00. Then, according to the SEC’s March 2025 complaint, Acosta initiated four ACH transfers totaling $406,000—none of which were backed by actual funds. He used the phantom deposits to execute trades, sold the positions before the checks bounced, and withdrew $93,000 in real money.

The scheme worked because the executing broker couldn’t verify the funds in time.

This isn’t a technology problem in the abstract. It’s a specific gap: the communication between executing brokers and custodians that confirms whether cash is actually available before a trade executes. Regulation T requires this verification for cash accounts. SEC Rule 17a-4 requires you to document it. And T+1 settlement means you have approximately zero margin for error.

THE MANUAL PROCESS MOST FIRMS INHERITED

Here’s how Letters of Free Funds typically work without automation:

A customer wants to trade in a cash account. The executing broker needs to confirm that funds are available at the custodian. Someone—usually in operations—sends a fax or email to the custodian asking for verification. The custodian responds (eventually). The response gets filed somewhere. Maybe a spreadsheet tracks it. Maybe not.

The problems compound: Finding the right contact at the custodian takes time. Response formats vary wildly between custodians. Tracking which requests are pending versus complete is manual. Proving compliance during an examination means reconstructing paper trails. T+1 settlement doesn’t wait for your fax machine.

WHAT PURPOSE-BUILT SOFTWARE ACTUALLY DOES

The industry-standard solution for automating Letters of Free Funds is a SaaS platform that sits between executing brokers and custodians, standardizing the request-response workflow.

Real-time or near-real-time verification. Instead of waiting hours or days for a custodian response, the system confirms fund availability in seconds. Pre-trade verification beats post-trade remediation—always.

Standardized communication. Whether the custodian is Schwab, Fidelity, Pershing, or a regional clearing firm, the request format is consistent. No more parsing twelve different fax formats.

Audit-ready recordkeeping. Every request, every response, every timestamp—automatically captured and stored in compliance with SEC Rule 17a-4. When the examination team asks for documentation, you produce it in minutes, not days.

Exception routing. When a verification fails or times out, the system flags it immediately. Operations teams focus on problems instead of monitoring queues.

WHERE LOFFA FITS

Loffa Interactive’s Freefunds Verified Direct (FVD) handles exactly this workflow. FVD streamlines communication between executing brokers and custodians to verify free cash balances before trades execute—enforcing Regulation T requirements automatically.

The platform includes straight-through processing for responses, automated indexing of incoming verification requests, and complete audit trails. For firms also managing prime brokerage relationships, FVD integrates with PBIN to automatically suppress or decline LOF requests when an F1SA is already on file—eliminating redundant verification steps.

THE DECISION POINT

If your firm is still managing Letters of Free Funds through email and spreadsheets, ask yourself:

How long does verification take from request to confirmation? What’s your exception rate, and how do you track it? Can you produce a complete audit trail for the last 90 days in under an hour? What happens when your one person who knows the process is out sick during quarter-end?

Manual processes work until they don’t. T+1 settlement shortened the window. The next Rey Acosta is already looking for the gap.

DISCLAIMER: This post is for informational purposes only and does not constitute legal advice. For guidance on specific regulatory obligations, consult your counsel or compliance advisor.